Real Estate Investing Real Estate Due Diligence 3

Question 1

What is the primary purpose of reviewing a rent roll during financial due diligence?

Accepted Answer

To verify current tenant occupancy, lease terms, and actual rental income

Answer

To determine the property's market value using comparable sales

Answer

To calculate allowable depreciation for federal tax purposes

Answer

To assess the environmental condition of the subject property

Question 2

An investor notices unusually low operating expenses in a property's trailing 12-month financials. The best response is to:

Accepted Answer

Investigate whether expenses are being understated, deferred, or omitted

Answer

Accept the financials as presented since they are signed by the seller

Answer

Increase the offer price based on the higher apparent NOI

Answer

Reduce the planned CapEx reserve since expenses seem well-controlled

Question 3

What does 'normalized' financials mean in real estate due diligence?

Accepted Answer

Adjusted financials that reflect stabilized ongoing operations by removing one-time events

Answer

Financials that have been independently audited by a certified public accountant

Answer

Financial statements prepared in strict conformance with GAAP standards

Answer

Financials that match the seller's historical tax returns line for line

Question 4

Which of the following liens is most difficult to extinguish through a standard real estate closing?

Accepted Answer

Federal IRS tax liens filed with proper statutory notice

Answer

First mortgage liens held by a conventional lender

Answer

Mechanic's liens filed by unpaid contractors

Answer

Prior-year property tax liens from the local municipality

Question 5

What is a 'proforma' analysis in real estate due diligence?

Accepted Answer

A projected financial analysis estimating anticipated future income and returns

Answer

An analysis of a property's verified historical operating performance

Answer

A legal review of property title, easements, and encumbrances

Answer

An assessment of recent comparable sales in the subject market

Question 6

What does a UCC (Uniform Commercial Code) search reveal during commercial real estate due diligence?

Accepted Answer

Liens on personal property or business assets that may be attached to the real estate

Answer

Zoning restrictions and permitted land uses on the property

Answer

Environmental contamination resulting from prior industrial operations

Answer

Outstanding property tax obligations owed to the local taxing authority

Question 7

A commercial lease contains a 'co-tenancy clause.' What does this clause typically provide?

Accepted Answer

The tenant's rent or right to occupy is contingent on specified anchor tenants remaining open

Answer

The tenant may sublease to another business without requiring landlord approval

Answer

The landlord must maintain all common areas to a contractually defined standard

Answer

The tenant may terminate the lease if the property is sold to a new owner